A couple of weeks ago I asked whether the correction was yet another false alarm and, sure enough, new highs by the major averages mean that we'll have to wait longer for a more meaningful correction. The broader market, though, continues weaker than the averages as the Russell 2000 is still down for the year as is my value portfolio. Small investors and speculators are now busy buying calls again and reinvesting the money they pulled out a couple of weeks ago. That momentum should push the market higher for the very short term but valuation remains terrible and sentiment never really got bullish enough to support some kind of meaningful advance. Technicals have improved modestly so my model has increased its exposure to 50% this week.Earnings:I am adding in 2015 earnings expectations now that we are in the final half of the year. This weighted estimate for 2014-2015 is still in an uptrend. As long as this continues, my first earnings indicator is positive.Looking at earnings 52 weeks ahead, estimates are also in a clear uptrend. With both indicators positive, earnings exposure remains at 100%, same as last week.Looking at the gap between last twelve month earnings and future 52 week projections, the gap has reached negative levels and that gap is increasing.The large and widening gap dictates a reduction in the earnings factor by 25%.Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: The equity put/call ratio has reversed and is now declining again. It is still at a neutral level, though.Exposure remains at 50%, same as last week. Small option buyers have also reversed course and are buying calls aggressively again.Exposure declines to 20%, down from 35% last week.NAAIM managers started to put some money back to work but their cash position is still neutral. Exposure remains at 50%, same as last week.Average sentiment exposure this week is 40%, down from 45% last week.

Valuation:My long term valuation indicator remains negative as expected stock returns over the next 10 years are still below the yield on the ten year treasury and are now back below 2%. This factor continues to call for 0 equity exposure.Percentage of stock prices represented by net current assets remained the same last week.Exposure remains at 0%, same as last week. Comparison of stock earnings yield to ten year treasury yield declined last week. Exposure declines to 50%, down from 70% last week.Total valuation exposure is 17%, down from 23% last week.

To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week, that number is 37%, down from 43% last week.

Technicals:My comparison of yields on treasury bonds compared to lower quality corporates remained in a decline last week.I subtract 10% to account for this factor. New highs - new lows on the Nasdaq increased to a positive position last week. I add 20% to account for this factor.My trend indicator for new highs - new lows on the Nasdaq is also positive and requires no adjustment.Total technical adjustments this week are +10%, up from -10% last week.

After adjustments, total exposure for the week is 47% or, after rounding, 50%.This level of exposure does not exceed the current earnings cap and is up from 25% last week.

It looks like a familiar pattern is being repeated. Modest market weakness improves sentiment but not to a level better than neutral. Then the market rallies, convincing more investors that timing is a waste of time. During the entire phase of mini-correction and recovery, valuation remains extremely high. It is impossible to know when this pattern will no longer be valid but, when it ends, I continue to believe that the market is vulnerable to a sharp and swift decline. My model still recommends caution with a small equity exposure.Earnings:I am beginning to add in 2015 earnings expectations now that we are in the final half of the year. This weighted estimate for 2014-2015 is still in an uptrend. As long as this continues, my first earnings indicator is positive.Looking at earnings 52 weeks ahead, estimates are also in a clear uptrend. With both indicators positive, earnings exposure remains at 100%, same as last week.Looking at the gap between last twelve month earnings and future 52 week projections, the gap has reached negative levels and that gap is increasing.The large and widening gap dictates a reduction in the earnings factor by 25%.Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: The equity put/call ratio has stalled out at a neutral level.Exposure remains at 50%, same as last week. Small option buyers have also stopped becoming more cautious.Exposure remains at 35%, same as last week.NAAIM managers held their cash position level with last week but my moving average increased to a neutral level. Exposure increases to 50%, up from 20% last week.Average sentiment exposure this week is 45%, up from 35% last week.

Valuation:My long term valuation indicator remains negative as expected stock returns over the next 10 years are still below the yield on the ten year treasury and are now back below 2%. This factor continues to call for 0 equity exposure.Percentage of stock prices represented by net current assets remained the same last week.Exposure remains at 0%, same as last week. Comparison of stock earnings yield to ten year treasury yield also remained the same last week. Exposure remains at 70%, same as last week.Total valuation exposure is 23%, same as last week.

To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week, that number is 43%, up from 39% last week.

Technicals:My comparison of yields on treasury bonds compared to lower quality corporates remained in a decline last week.I subtract 10% to account for this factor. New highs - new lows on the Nasdaq increased to a neutral level last week. I make no adjustment for this factor.My trend indicator for new highs - new lows on the Nasdaq is not operative since the previous indicator is negative or neutral.Total technical adjustments this week are -10%, up from -20% last week.

After adjustments, total exposure for the week is 33% or, after rounding, 25%.This level of exposure does not exceed the current earnings cap and is the last week.

There has been enough improvement in my sentiment indicators to allow for moving a modest amount of capital back into the market. Those improvements have been balanced by deterioration in the technical indicators due to recent market weakness. With the geopolitical situation very unstable, it is easy to see why investors are on edge but earnings are actually coming in better than expected. My model calls for some money to be put to work but only to a limited extent.Earnings:I am beginning to add in 2015 earnings expectations now that we are in the final half of the year. This weighted estimate for 2014-2015 is still in an uptrend. As long as this continues, my first earnings indicator is positive.Looking at earnings 52 weeks ahead, estimates are also in a clear uptrend. With both indicators positive, earnings exposure remains at 100%, same as last week.Looking at the gap between last twelve month earnings and future 52 week projections, the gap has reached negative levels and that gap is increasing.The large and widening gap dictates a reduction in the earnings factor by 25%.Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: The equity put/call ratio continued to improve last week.Exposure increases to 50%, up from 35% last week. Small option buyers have also become more cautious and have cut back on call purchases.Exposure increases to 35%, up from 20% last week.NAAIM managers finally decided that discretion was the better part of valor and increased their cash position in a meaningful way. Exposure increases to 20%, up from -10% last week.Average sentiment exposure this week is 35%, up from 0% last week.

Valuation:My long term valuation indicator remains negative as expected stock returns over the next 10 years are still below the yield on the ten year treasury. This factor continues to call for 0 equity exposure.Percentage of stock prices represented by net current assets remained the same last week.Exposure remains at 0%, same as last week. Comparison of stock earnings yield to ten year treasury yield also remained the same last week. Exposure remains at 70%, same as last week.Total valuation exposure is 23%, same as last week.

To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week, that number is 39%, up from 0% last week.

Technicals:My comparison of yields on treasury bonds compared to lower quality corporates finally entered a decline last week.I subtract 10% to account for this factor. New highs - new lows on the Nasdaq remained marginally negative last week. I subtract 10% to account for this factor.My trend indicator for new highs - new lows on the Nasdaq is not operative since the previous indicator is negative.Total technical adjustments this week are -20%, down from -10% last week.

After adjustments, total exposure for the week is 19% or, after rounding, 25%.This level of exposure does not exceed the current earnings cap and up from 0% last week.

There have been many false starts to a correction and this may be another one. However, as time passes, each decline has been ignored more than the previous one. The key to creating some base for a renewed rally will be an improvement in sentiment and in valuation. While they have both improved marginally last week, they are a long way from being bullish. My model is still keeping me in a fully hedged position although the underperformance of the smaller stocks has hurt my performance compared to the S & P 500. The potential for a further sharp drop is still present.Earnings:I am beginning to add in 2015 earnings expectations now that we are in the final half of the year. This weighted estimate for 2014-2015 is still in an uptrend. As long as this continues, my first earnings indicator is positive.Looking at earnings 52 weeks ahead, estimates are also in a clear uptrend. With both indicators positive, earnings exposure remains at 100%, same as last week.Looking at the gap between last twelve month earnings and future 52 week projections, the gap has reached negative levels and that gap is increasing.The large and widening gap dictates a reduction in the earnings factor by 25%.Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: The equity put/call ratio improved last week and a very bullish reading occurred on Friday.Exposure increases to 35%, up from 5% last week. Small option buyers have also increased their put buying.Exposure increases to 20%, up from 5% last week.NAAIM managers remained essentially fully invested last week. Exposure remains at -10%, same as last week.When one of my sentiment indicators is maximum bearish and the other two are neutral or negative, I assign a sentiment factor reading of 0%. This is the same as last week.

Valuation:My long term valuation indicator remains negative as expected stock returns over the next 10 years are still below the yield on the ten year treasury. This factor continues to call for 0 equity exposure.Percentage of stock prices represented by net current assets remained the same last week.Exposure remains at 0%, same as last week. Comparison of stock earnings yield to ten year treasury yield increased last week. Exposure increases to 70%, up from 50% last week.Total valuation exposure is 23%, up from 17% last week.

To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week, that number is 0%, same as last week.

Technicals:My comparison of yields on treasury bonds compared to lower quality corporates remained in a neutral position last week.There is no adjustment to account for this factor. New highs - new lows on the Nasdaq turned marginally negative last week. I subtract 10% to account for this factor.My trend indicator for new highs - new lows on the Nasdaq is not operative since the previous indicator is negative.Total technical adjustments this week are -10%, down from +5% last week.

After adjustments, total exposure for the week is -10% or, after rounding, 0%.This level of exposure does not exceed the current earnings cap and is the same as last week.